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Determinants and Trading Performance of Equity Deferrals by Corporate Outside Directors

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  • Francesca Franco

    (London Business School, London NW1 4SA, United Kingdom)

  • Christopher D. Ittner

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Oktay Urcan

    (University of Illinois at Urbana–Champaign, Champaign, Illinois 61820)

Abstract

This study investigates the determinants and trading performance of outside directors’ equity deferrals, which represent the choice to convert part or all of their annual cash compensation into deferred company stock. Using a large sample of S&P 1500 firms that allowed directors to defer their cash fees into equity between 1999 and 2009, we find significant associations between equity deferral choices and specific features of the director compensation plans, proxies for directors’ outside wealth diversification, and future firm stock market performance. Trading performance analyses indicate that outside directors earn substantial abnormal returns from their deferrals, with a significant proportion of the deferral transactions occurring during blackout periods. These results are consistent with companies structuring director equity deferral plans to circumvent U.S. Securities and Exchange Commission Rule 10b-5’s trading restrictions.

Suggested Citation

  • Francesca Franco & Christopher D. Ittner & Oktay Urcan, 2017. "Determinants and Trading Performance of Equity Deferrals by Corporate Outside Directors," Management Science, INFORMS, vol. 63(1), pages 114-138, January.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:1:p:114-138
    DOI: 10.1287/mnsc.2015.2332
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